Is it considered good debt?
Although some people try to avoid debt altogether, most financial experts acknowledge that there is a difference between good debt and bad debt. Bad debt is any money that you owe on an asset that will lose value quickly. A car loan, for example, is bad debt because by the time you pay off the car, it will be worth a small fraction of its original value. Good debt, on the other hand, is money borrowed towards an asset that will appreciate in value. Mortgage debt falls into this second category. In most cases, mortgage debt is good debt.
Why are mortgages good debt?
A mortgage is considered good debt because the item you borrowed the money against—your home—is something that will increase in value during your ownership. Of course, there are some exceptions to this trend. If your foundation cracks, the roof caves in, or you have a major fire, then your home will obviously decrease in value. But these are just the risks you take with the investment.
You can, of course, also take steps to decrease the risk of losing money on your home. Make sure you have a good homeowners insurance policy (your bank will require it). This way, if your home does suffer major damage, you won't be responsible for the repairs needed to restore the home to its prior condition. You should take good care of your home. Replace materials as they wear out, make small updates over the years, and keep the yard clean and tidy. All of these actions will add up to preserve the home's value, helping to ensure you can sell it for more than you paid.
Interest rates matter.
Another reason why mortgage debt is good debt is that mortgages tend to come with a low interest rate. Most applicants can get a 30-year, fixed-rate mortgage at less than 4.00% interest these days. This means that as long as your home's value increases by more than 4.00% per year, you will be making money on your investment. Plus, in the meantime, you will have had a place to live. Paying 4.00% interest in a home you can sell for a profit a few years down the road is definitely better than paying rent to a landlord—an expense that won't offer you any return.
Using a mortgage to your advantage.
There are also other ways to use your mortgage to your advantage. Once you've amassed a decent amount of equity in the home, you can borrow against that value in the form of a home equity loan or a home equity line of credit. Basically, these loans are like second mortgages, and they come at a similarly low interest rate to a mortgage. You can use your home equity loan to make home improvements, send your children to school, and pay off other higher-interest debts. If you never took on a mortgage to buy a home in the first place, you would not have these financially savvy options.
As long as you choose the right debts, borrowing money can be a good way to get ahead financially and earn yourself some financial security. Mortgage debt is good debt because you are purchasing an asset that increases in value, at a low interest rate, and with the option to borrow against any equity in the future. While it can be scary to take on $150,000, $200,000, or an even greater sum in the form of a mortgage, if you can afford to make this purchase, it is a smart one to make.
Equal Housing Lender